What to do when banks don’t trust other banks enough to lend one
another money? Give them $250 billion and a strict command: "Spend it!"
That was agenda item number one for Treasury Secretary Henry Paulson
yesterday as he and President Bush announced another major injection of
cash to help lubricate the world’s stuck credit markets.
"The needs of our economy require that our financial institutions not
take this new capital to hoard it, but to deploy it," Mr. Paulson said,
according to The New York Times.
The comment seemed strange to us. If Messrs. Paulson and Bush are so
intent on the banks spending taxpayer money instead of packing it under
mattresses, perhaps they should write such language into the contract
instead of asking – begging? – for it in a press conference.
But in other ways, buried deep inside the torrent of proposals
rapidly remaking the credit and investment worlds are some prudent
insurance policies that protect the big new investors (namely, U.S.
taxpayers). One of the niftier examples is the fed’s purchase of bank
stocks. The contract guarantees a dividend of five percent, rising to
nine percent by year five of the contract (we wish we could get a
company to give us such a promise).
The stocks also come with "warrants" worth 15 percent of the stock’s
face value. If the stock price goes up, so does the value of the
warrant. If stock prices drop, the warrant becomes null and void.
(Again, we wish we had such a clause on our 401(K) investments last
week).
The upshot is that, faced with a virtual collapse of the credit
markets, the U.S. government joined with European countries and Japan
to provide the largest injection of taxpayer cash into the financial
markets ever. The reaction of the markets appears mixed so far – after
recording the largest jump in value in its history on Monday, the Dow
Jones industrial average slipped somewhat by Tuesday afternoon.
Here’s what you can do about all of this:
- Nothing. Henry Paulson and the chiefs of other major world banks swept
down from the heavens yesterday to announce partial taxpayer takeover
of the credit and financial markets. At a time like this, all we mortals can do is settle into the couch with a nice bowl of ice cream. - Read. Once the ice cream headache wears off, it’ll be the perfect
time for an informal class on how credit really works. Simply reading
newspapers and their online equivalents every day right now will teach
you more about Wall Street, regulators and credit than the first
semester of business school. - Get involved. Voter opposition to the $700 Billion Wall Street
bailout sunk the first two proposals, and appears likely to sink a few
members of Congress this election. Once you’ve had your snack and your
daily reading, you’ll be prepared to write your representatives and
make sure they vote for your interests.
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